L.IKE MANY Chinese companies on the stock exchange, Gangtai Holding, a jewelry-to-real estate conglomerate, are displaying their listing. The ticker number 600687 will be featured prominently on the website and in the advertisements. But not for long. On Jan. 7, Gangtai began a 30-day period that almost certainly ended with its expulsion from the Shanghai Stock Exchange. It is among a growing number of Chinese companies delisting at home.
In recent months, all delisting talks have focused on the removal – or not – of Chinese companies from American stock exchanges (see items). Within China, however, a potentially more important type of delisting is on the agenda: regulators have made it easier to remove lousy companies from their listing status. It is the latest in a series of reforms to modernize the stock market, which has long been viewed as a casino rather than an efficient capital dispenser.
Delistings are a staple of healthy exchanges, a mechanism for eliminating scabies. In America, a few dozen companies are typically pushed off their stock exchanges each year, often due to low market values. In the early 2000s, after the dotcom bankruptcy, annual delistings soared to nearly 400. In contrast, China has performed an average of seven delistings per year for the past decade, despite having more than 4,000 publicly traded companies, almost as many as America.
Delistings were so rare in China, mainly because it was difficult to get listings yourself relative to demand. “Even if a company is close to bankruptcy, the Shell listing is really high. Only if you stay alive can you find a buyer, ”says Lu Fangzhou of the University of Hong Kong. This has created perverse incentives. Listed companies in financial difficulty in China are classified as “special treatment” (abbreviated as) ST before their ticker name to warn investors. Instead, however, it is often a solicitation to increase their prices as buyers might show up. ST Stocks are volatile, but their returns have occasionally outperformed the overall market (see chart).
That has changed recently. Regulators loosened control over initial public offerings and paved the way for hundreds of new listings. The value of being a clam decreased. The delisting reform introduced on the last day of 2020 attacks the problem from the other end. Companies with stock prices below 1 yuan ($ 0.15) for 20 consecutive days will now be automatically delisted. Those who fraudulently overestimate their earnings by 100% for three years are also on the chopping block.
The process also becomes much faster, eliminating an interim trade disruption – when troubled companies could find buyers. China’s delistings could soar to around 50 per year. Some investors complain that the rules are still too lenient. For example, Luckin Coffee, a potential Chinese rival of Starbucks, has been fired from Nasdaq for making transactions. in China, the listing could probably have survived. But Zhou Maohua of China Everbright Bank advises patience, saying the rules will adjust over time.
In Gangtai’s case, the company was overwhelmed. The gold miner and jewelry maker was dragged into the property, even planning a skyscraper, and buying Buccellati, an Italian jewelry store. However, seeing huge losses, it defaulted on payments and sold its best assets. Delisting is the most recent humiliation. At least it can comfort itself that it will soon have a lot of company. ■
This article appeared in the Finance & Economics section of the print edition under the heading “Bring out your dead”